Albert Einstein once said that the most powerful force in the universe was compound interest. Anyone who wants to retire comfortably -- or early -- knows that the key is using compound interest to your advantage.
No one is in a better position to harness this force than those who have just started earning a regular salary. But popular wisdom tells you that it is just this demographic that has a tough time saving for retirement. Salaries are typically lower, and student loans have ballooned lately.
But is this really the case? Using information from the Bureau of Labor Statistics' (BLS) Consumer Expenditure Survey for 2014, we'll see how -- done prudently -- the average American is very capable of laying a solid foundation for a nest egg.
A quick word on our numbers
Technically, the data isn't solely for those "just out of college": it includes all households where the reference person is between 25 and 34. Of these folks, 71% have attended college.
The household typically includes two adults and one child under the age of 18. On average, there are between one and two cars in the household, and there's an even split between single- and dual-income households.
Now that we have that out of the way, on to our numbers!
The average household income for this group is $54,622 after taxes -- or $4,552 per month. Here's how that paycheck gets divvied up across the nation.
Housing ($1,450 per month)
Among households in this age group, 61% are renting. The average rent/mortgage check is $894 per month. Obviously, this figure will vary widely based on location. The rest of the balance of housing money is devoted to utilities, household supplies, furniture, and appliances.
Money left over=$3,102
Transportation ($742 per month)
This includes monthly payments for the purchase of new/used cars, which runs roughly $296 per month. Last year, an average of $204 per month was spent on gasoline -- though you can bet that this figure will be lower when 2015's numbers are published. The rest is used on maintenance, insurance, and "other vehicle expenses."
Money left over=$2,360
Healthcare ($222 per month)
Here's where it really pays to be young. Healthcare spending is one of the only categories that consistently inches upward throughout life -- even after you've retired. Of this total, about $160 per month is used to cover insurance premiums, which likely means that employers are chipping in a significant percentage of the total cost of coverage.
Money left over=$2,138
Food ($553 per month)
Even though our "average" household is likely to include a young child, that doesn't stop everyone from going out to eat. Typically, $243 is spent on eating out (including fast food). Meats, fish, eggs, fruits, and vegetables make up over 40% of the $310 that is spent monthly for food at home.
Money left over=$1,585
Entertainment ($202 per month)
When you think about it, it's a pretty good deal when you're able to spend as much on entertainment as you do on healthcare. I should note that these figures include the costs of pets, TVs, hobbies, and any type of event you might attend.
Money left over=$1,383
Pensions and Social Security ($445 per month)
It's kind of a misnomer when the BLS offers "after-tax" numbers. That's because it lumps your payments into the Social Security system in with any contributions you make to a pension plan. As you'll see at the end, though, even with reduced benefits in the future, Social Security can play a key role in your retirement.
Money left over=$938
Education ($91 per month)
Many will argue that this number should be higher to better correspond to the nation's bulging student debt load. But there are a couple of things to keep in mind here: first, much of the student debt problem arose from poorer students borrowing moderate amounts of money to attend for-profit schools and not being able to pay it back. And second, many loans are structured to last for 10 years. If we assume the typical student graduates at 23, there's a significant portion of this cohort that has already paid off their loans.
Money left over=$847
Other ($424 per month)
This covers a lot of different categories: clothes, alcohol, personal care products, cigarettes, donations, and even alimony payments. Lump all of them together and, on average, this is what you get.
That leaves the average household with $423 per month
This may sound like a lot or a little, depending on your point of view. But let's put it in perspective. This is equivalent to saving $5,076 per year.
If we assume that a couple, aged 30, is able to put away this much every month until they retired at age 67, adjusted for inflation, and assuming a return of 9% (just below the stock market's historical average), they would have an equivalent of $484,000 in their nest egg come retirement time.
As I showed two weeks ago, when combined with Social Security, that's enough for most Americans to live through retirement without having to worry too much about money. Further, these assumptions ignore the fact that savings rates go up later on in life.
Obviously, not everyone who reads this will represent the "average" household for this age group. There's tons of variability. If nothing else, a key takeaway should be that if you want to super-charge your savings, focus on the Big Three of housing, transportation, and food to leverage your efforts.
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